One of the sell side analyst pointed out that the 20 DMA Vix has recently crossed 50 DMA Vix from the bottom which means it is a bearish sign. If you look at the historical data, there have been three instances in last one year that have seen markets come off by 6-36% in a matter of 20-40 days after the 20DMA vix crossed 50DMA vix from the bottom. A similar trend can be seen from 2004 to 2007 when markets lost 7-11% in 8-40 days. Hence, the analyst has a point.
Will this time be the same or any different? There are two instances (Jul'05 & Dec'06) when the above trend has not happened. There are other factors which become important. Consider today's scenario. The flows from FIIs and DIIs are pretty strong. The results declared by companies for first quarter are not all that bad. The markets have closed above 200 DMA for the first time. The global markets are also on the uptrend. Considering these factors, we could see markets sustain current levels. However, we have the mother of all events in mid May - the process of government formation. If the exit polls are to be believed and the voices of various political parties taken seriously, there is no clear sense as to who will form the government. This could just spook the markets. As usual, there are no clear answers for fund managers but May could provide a good entry point for long term investors.
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